1.33 Query:

Treatment of expenditure incurred as compensation to employees and salary for the waiting time

in respect of relocation of a unit to an alternate place.

1. A large public limited company is involved in manufacturing products at different locations in the country. One of the units of the company which is located at Delhi was ordered to be closed by the Supreme Court vide its order dated 30.11.96 by which 168 units were totally shut down in Delhi.

2. The Court ordered for the payment of compensation in respect of employees who were to be retrenched/relocated. In the instant case the employees of the unit are being relocated and, hence, the company is paying compensation for shifting and salary for the waiting time will till the alternate unit is ready for production. The company wishes to capitalise the above expenditure in its books of account.

3. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)        Whether the capitalisation of the said expenditure in books of account is correct.

(b)        Whether the said amounts can be claimed as deduction in the income-tax return though the same have been capitalised in books of account.

                                                                            Opinion                                March 17, 1998

1. The opinion of the Expert Advisory Committee expressed herein is restricted to the accounting treatment of the expenditure incurred in paying compensation for shifting and paying salaries for the waiting time to employees being relocated till the alternate unit is ready for commercial production. The Committee has not considered the taxation aspect of the above expenditure since it is beyond the purview of the Committee in view of Rule 2 of the Advisory Service Rules.

2. The Committee is of the view that compensation paid to employees for shifting the unit and the salaries paid for the waiting time till the alternate unit is ready for production, do not generate any future economic benefit. Accordingly, in the view of the Committee such amounts should not be capitalised, but treated as a loss in the profit and loss account of the year in which these are incurred.

3.  Based on the above, the Committee is of the following opinion on issues raised at para 3 of the query:

(a)        The treatment of capitalising the expenditure incurred in paying compensation for shifting and paying salary for the waiting time is not correct. The amounts in this regard should be written off as a loss in the profit and loss account of the period in which incurred.

(b)        No opinion in view of para 1 above.

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